Dollar Consolidates as Markets Await Fresh Drivers

March 25, 2024

Win Thin

The dollar is consolidating its recent gains; Fed officials are starting to reveal their Dots; February Chicago Fed NAI will be the highlight; regional Fed surveys for March and February housing data will continue rolling out
The ECB is on track to cut rates in June; Market expectations for BOE easing have adjusted after it delivered a dovish hold last week
Jawboning from Japan’s top currency official has picked up; BOJ released the minutes of the January 22-23 policy meeting; Singapore and Malaysia reported higher than expected February CPI

The dollar is consolidating its recent gains. DXY is trading lower near 104.318 after trading Friday at the highest since mid-February near 104.428. It remains on track to test the February 14 high just below 105. The euro is trading higher near $1.0820 while sterling is trading higher near $1.2620. USD/JPY is trading flat near 151.35 as official jawboning about the weak yen picks up (see below). The dollar recovery should continue, not just on dovish developments from other central banks but also from Fed repricing. The U.S. data continue to come in mostly firmer and it’s clear from the Dot Plots (see below) that most Fed officials remain very cautious about easing too much or too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should gain even further.

AMERICAS

The dollar is consolidating its recent gains. This was the best two week stretch for DXY since mid-May 2023, and the price action goes to show just how important the relative story is for FX. Despite the market's dovish take on the Fed, dovish developments in the rest of the world have helped maintain the dollar’s relative attractiveness. We still believe the dovish Fed take is wrong, and so the greenback should see another leg higher when market expectations adjust further. Odds of a June cut are holding just above 80% vs. 60% at the start of last week.

Fed speakers are starting to reveal their Dots. Late Friday, Bostic acknowledged that he shifted his 2024 Dot from two cuts to one, which keeps him firmly in the hawkish part of the Fed spectrum. Bostic speaks again today. Recall that in the latest Dot Plots, 1 saw four cuts, 9 saw three cuts, 5 saw two cuts, 2 saw one cut, and 2 saw no cuts. As such, the unchanged 2024 median boiled down to just one dove at three cuts. We expect other FOMC members to reveal their Dots in the coming days. Goolsbee and Cook also speak today.

February Chicago Fed National Activity Index will be the highlight. Headline is expected at -0.34 vs. -0.30 in January. If so, the 3-month moving average would fall to -0.21 vs. -0.02 in January. This would be the lowest since October but still quite far away from the -0.7 threshold that signals recession.

Regional Fed surveys for March will continue rolling out. Dallas Fed manufacturing index is expected at -11.5 vs. -11.3 in February.

More housing data will be reported. February new home sales are expected at 2.1% m/m vs. 1.5% in January. Last week, existing home sales, housing starts, and building permits all came in much stronger than expected as the housing sector continues to recover.

EUROPE/MIDDLE EAST/AFRICA

The ECB is on track to cut rates in June. Official messaging has led the market to largely price in the first cut at the June 6 meeting. Cuts are then fully priced in for September 12 and October 17, while the market sees nearly 70% odds of a fourth cut December 12. Holzmann speaks later today. As one of the leading hawks, he is likely to push back against aggressive easing expectations.

Market expectations for Bank of England have adjusted after it delivered a dovish hold last week. The market now sees over 80% odds of a cut June 20, up from 50% at the start of last week. Mann speaks later today. Her comments will be of particular interest after she shifted her vote last week to steady rates vs. preferring a 25 bp hike for the past several meetings.

ASIA

Jawboning from Japan’s top currency official has picked up. Vice Finance Minister for international affairs Kanda warned overnight that “the current weakening of the yen is not in line with fundamentals and is clearly driven by speculation,” adding “we will take appropriate action against excessive fluctuations, without ruling out any options.” The BOJ last intervened to stem JPY weakness between September and October 2022. USD/JPY ultimately peaked at 151.95 on October 21, 2022, and the pair has not yet broken above this resistance level. In our view, it’s only a matter of time before USD/JPY makes new cyclical highs in part because we anticipate the BOJ’s policy normalization process will be gradual and brief.

Bank of Japan released the minutes of the January 22-23 policy meeting. Policy was left unchanged at this meeting, but it’s clear from the minutes that bank was inching towards liftoff. One board member said the bank had “a golden opportunity” to change monetary policy, while “many members expressed the recognition that, given the current outlook for economic activity and prices, it was highly likely that accommodative financial conditions would be maintained even if policy actions such as the termination of the negative interest rate policy were implemented.” One member said it was hard to determine in advance what the terminal rate will be, as well as the rate path toward that level. On Thursday, the BOJ will release the summary of opinions from the March 18-19 policy meeting, when it raised the policy rate ended yield curve control. The summary of opinions may shed more light on the bank’s thinking.

Singapore reported February CPI. Headline came in at 3.4% y/y vs. 3.2% expected and 2.9% in January, while core came in at 3.6% y/y vs. 3.4% expected and 3.1% in January. This was the highest core reading since July. While the Monetary Authority of Singapore does not have an explicit inflation target, persistent price pressures should keep it on hold at the next policy meeting in April.

Malaysia reported February CPI. Headline came in at 1.8% y/y vs. 1.5% expected and actual in January. This was the highest since October. While Bank Negara does not have an explicit inflation target, rising price pressures and the weak ringgit are likely to keep it on hold for the time being. Next policy meeting is May 9, and no change is expected. Indeed, the swaps market continues to price in steady rates over the next three years.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2022. All rights reserved.